What You Need to Know Ahead of Apple's Earnings
On a bad day for the U.S. technology sector, $Apple(AAPL)$
The company is expected to announce its first-quarter results after the market closes on Jan 30. Analysts estimate Apple to post revenue of USD124.09B for 2025Q1, up 3.77% YOY; EPS is estimated to be USD2.34, up 7.55% YOY.
Apple's Services Revenue Growth Expected to Boost Overall Margins
Apple's Services sector, known for its higher gross margins compared to its Products sector, is projected to continue its robust growth at a mid-teens rate, outpacing Product revenue growth. This trend has historically contributed to the expansion of Apple's overall gross margins, which have risen from 38.5% in FY17 to an anticipated 46.2% in FY24. The sustained growth in Services is expected to drive further increases in aggregate gross margins, leading to earnings growth that surpasses revenue growth.
Apple has reported robust performance in its Services division for the recent quarter, with revenues reaching $24.972 billion and a gross margin (GM) of 74%. The company highlighted that its Services' recurring revenue component is expanding faster than transactional revenue. According to Wells Fargo, an increase in Services gross margins to 74.6% is anticipated for the December quarter.
Apple also noted significant growth in its subscriber base, now boasting over 1 billion paid subscribers, which is more than double the figure from four years ago. The number of paid subscribers continues to grow at a double-digit rate, underscoring the company's successful expansion and retention strategies within its Services sector.
Apple Faces Sales Decline in China, but J.P. Morgan Predicts Future Growth with iPhone 17
Apple's smartphone sales fell sharply in Q4 in China, Counterpoint Research says Apple's smartphone sales in China fell 18% in Q4, putting it in third place behind Huawei and Xiaomi, Counterpoint Research said. Huawei's phone sales rose 15.5% y/y during the quarter.
However, J.P. Morgan anticipates a significant iPhone sales upcycle beginning with the launch of the iPhone 17 in F1Q26 (December 2025). The firm's projections suggest an increase in iPhone unit sales from 224 million in FY23 to 230 million in FY24 and FY25, escalating further to 251 million in FY26 and 263 million in FY27. This expected growth is attributed to both volume increases and advantageous price/mix effects. Specifically, iPhone revenue growth in FY25 is forecasted to be driven by price/mix tailwinds, while FY26 is set to see accelerated revenue growth due to combined volume increases and continued price/mix advantages.
Gradual Growth Anticipated in AI-Led Services Revenue for Apple
As AI technology continues to advance and integrate more deeply at the edge, Apple is positioned to capitalize on the expanding AI-led Services opportunity. The proliferation of edge AI applications is expected to drive growth in this sector. Nonetheless, the significant impact of these AI-related services on Apple's overall Services revenue will require a steady and gradual increase. This is due to the dependency of App Store revenues on the installed base of applications and the generated recurring and transactional revenue. Although promising, the AI-led Services are projected to take time before they contribute materially to Apple's revenue growth.
Apple is set for major product updates in 2025, expected first-quarter launches include the iPhone SE4, M4 MacBook Air, iPad 11, iPad Air, and a smart display.
Is there still a buying opportunity for Apple?
Apple has had a rough start to the year, with concerns about the latest iPhone sales adding to its woes.
Some experts on Wall Street are expressing concerns about potential further negative developments. Analyst Edison Lee from Jefferies downgraded Apple's shares to an underperform rating on Tuesday, based on his anticipation that the company's outlook for the March quarter will be disappointing. "Our concern about weak demand for iPhone has materialized," Lee noted.
Barclays has lowered its price target on Apple from $184 to $183, keeping an Underweight rating. The firm anticipates modest results for the December quarter due to strong Services and Mac sales offsetting weak iPhone sales. Looking ahead, Barclays is cautious about the March quarter, citing reduced iPhone 16 production, adverse currency effects, and limited iPhone SE4 sales, leading them to set revenue and earnings estimates below consensus.
However, some analysts still maintain an optimistic outlook for Apple. Analysts at Wells Fargo advised investors to view Apple's performance as fundamentally positive and provided a neutral guidance, as we continue to wait for the momentum of the iPhone 16 cycle.
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